TABOR and the Gallagher Amendment

In order to talk about the Colorado Taxpayer Bill of Rights (TABOR) and the Gallagher Amendment, we need to know a little bit about property tax.

Property tax is an ad valorem (value-based) tax that an owner of real estate or other property pays on the value of the property being taxed. Property taxes fund municipal budgets for school systems, sewers, parks, libraries, fire stations, hospitals, and so on and are levied by taxing entities like counties, municipalities, school districts, and special taxing districts.

In order to calculate property tax, the market value of the property is multiplied by the assessment rate and the mill levy. In other words:

property tax = (market value of property) x (assessment rate) x (mill levy)

Market value is determined by recent sales of similar property in the area. A mill levy is the property tax rate levied by a taxing entity (such as a school district) and is expressed as a permille (where 1 mill is $1 of tax per $1,000 of assessed value).

It’s worth considering an example. In order to calculate the residential property tax on a $100,000 home in 2008, we multiply the value of the home by the current Colorado residential assessment rate (7.96%), which yields $7,960, and then again by the mill levy. Using a mill levy of 100 mills (for this example), the total tax liability for our $100,000 home in 2008 is $796.

Commercial property tax is determined using the same formula with an assessment rate of 29%. If our $100,000 home were instead a commercial property, the total property tax liability would be $2,900 (100 mills x $29,000).

By virtue of a ballot measure passed by voters in 2008, the City of Salida does not levy property taxes.

What is the Gallagher Amendment?

The Gallagher Amendment divides the state’s total property tax burden between residential and nonresidential (commercial) property such that 45% of the total amount of state property tax collected must come from residential property and 55% must come from commercial property.

Additionally, the Amendment requires that the assessment rate for commercial property (or, the portion of commercial property subject to property taxes) be fixed at 29%. Because the commercial property rate is fixed, the residential rate is annually adjusted to hold the 45/55 split constant.

The Amendment also requires that all property values be reassessed every two years (in odd years) by the county assessor of the county in which they are located.

Gallagher was passed by voters in 1982 after Colorado residents upset by increasing property taxes pressured the state legislature for redress. The Amendment was authored by nine members of the General Assembly headed by Dennis Gallagher. The 45/55 split mandated by the Amendment reflected the actual ratio of residential and commercial property values in 1982.

What are criticisms of Gallagher?

Residential property values have significantly outpaced commercial values since 1982 and today account for about 75% of the state’s total property value while being responsible for only 45% of the state’s total property tax burden. Conversely, commercial property, which now accounts for only about 25% of total property value in the state, is still responsible for 55% of the state’s total property tax burden. In order to maintain the 45/55 split, the residential property assessment rate has dropped from 21% in 1982 to the current (2007-2008) level of 7.96%.

The Colorado Association of Commerce and Industry maintains that the Gallagher Amendment has shifted billions (as of 2001) in property tax liability from residential to commercial property owners and argues that high commercial property taxes have, among other things, discouraged business investment and harmed economic development.*

With the passage of TABOR in 1992, a collusion between Gallagher and TABOR has resulted in a structural racheting-down of revenue for local governments.

Traditionally, mill levies were allowed to float in order to counteract any decrease in funding from property taxes for local governments during economic downturns. TABOR, however, has been interpreted as requiring that any increase in a mill levy is subject to a popular vote. Therefore, when total assessed property value decreases, local taxing entities cannot increase the mill levy and the amount of money brought in by property tax decreases.

Similarly, when property values increase such that the total tax revenue of a jurisdiction surpasses the revenue limit established by TABOR, the mill levy might have to be lowered. If assessed property values then decrease, the mill levy cannot be increased without a popular vote.

Amendment 23 requires school funding to increase annually by the rate of inflation plus one percent. The interaction between TABOR, Gallagher and Amendment 23 has obligated the state to shoulder a greater share of funding Colorado’s public schools. In the absence of constitutional reform, this trend will continue; funding of K-12 education will likely demand more than 80% of the state’s general fund appropriations by 2012.**

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* The Fatal Flaw in Colorado’s Business Climate, Barry Poulson
** 2007 Colorado General Assembly Legislative Session Outlook, Tomlinson & Associates

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